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Brexit and UK Energy Security: Perspectives fromUnconventional Gas Investment and the Effects ofShale Gas on UK Energy Prices

Elijah Acquah-Andoh * , Augustine O. Ifelebuegu and Stephen C. Theophilus

School of Energy, Construction and Environment, Coventry University, CV1 5FB Coventry, UK;[email protected] (A.O.I.); [email protected] (S.C.T.)* Correspondence: [email protected]

Received: 25 December 2018; Accepted: 8 February 2019; Published: 14 February 2019��

Abstract: Many aspects of the present and future effects on the UK economy, industry, and households,of Brexit have been researched. One thing which appears certain about Brexit is the shadow ofuncertainty it casts on the future of business in the UK and its telling effects on the UK economy. It isbelieved that Brexit has negatively affected the level of investments in the UK, including investmentsin energy and crucially the upstream oil and gas, with the UK North Sea being starved of investmentssince 2014, leading already to increased energy bills. The UK is a net importer of natural gas—a majorsource of its energy, with some dependence on supplies from interconnectors from Europe. At thesame time, UK energy companies participate in the common energy market which enables them toundertake arbitrage trading under the common market rules. However, both of these benefits couldbe lost under a Brexit scenario where the UK and EU come to a no-deal or hard border arrangement.Meanwhile, domestic production of energy in the UK has declined for nearly two decades now andimport bills for natural gas are growing—they were £14.2 billion in 2017; £11.7 billion in 2016 and£13.4 billion in 2015—with Government projections indicating an upward trajectory for natural gasimports. It is however believed that the UK has great potential to exploit shale gas to her advantagein order to reduce her reliance on foreign energy which is: (1) less predictable in terms of supply andprice affordability and (2) dependent on exchange rates—a primary means through which energyprices increased in 2016/17 post-Brexit referendum vote. The current study extends discussionson shale gas to cover a review of the potential of natural gas from shale formations to cushion UKhouseholds against further erratic gas prices due to Brexit and also assesses the potential effectsBrexit may have had on the level of investments in shale gas, in order to suggest policy options forgovernment consideration. Contrary to popular studies, we find evidence to suggest that shale gashas the potential to reduce energy prices for UK businesses and households at commercial extractions,under both hard and soft Brexit scenarios, but with more benefits under hard Brexit. Importantly,we find that from 2008 to 2017, average UK net export of natural gas was 5,191 GWh per year to theEU. We also find and argue that Brexit may have starved the nascent fracking industry of investmentsin a similar way it did to investments in conventional oil and gas and could have increased investorrisk premium for shale gas development, the ultimate effect of which was a categorisation of fracking(company stock) as riskier asset for investors on the London Stock Exchange. We recommend thatshale gas development be expedited to maximise its benefits to UK energy consumers post-Brexit oreconomic benefits from the resource could be diminished by rising operator costs due to delays andeffects of the public’s perceived negative opinion of the method of extraction.

Keywords: shale gas; development; investment; Brexit; energy prices

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1. Introduction

Brexit holds enormous uncertainty for the future of most businesses in the UK. Variousassessments have been made with regard to the implications of Brexit. It has been found to haveplunged bank stock prices [1], negatively affected leisure and travel [2] and, reduced investments [3]among others. Perhaps a more crucial assessment of the potential implications of Brexit for UKhouseholds and businesses is in the area of energy supply and security. The UKCS produces andsupplies the largest share of domestic energy to UK homes and businesses. However, according tothe Oil and Gas UK, Brexit could cause “production shut down of the UK North Sea” under a hard orno-deal Brexit scenario. The question then is, under such scenario, might shale gas contribute to thesecurity of UK energy supply? Energy is a fundamental propeller of economic activity and continuedinvestment in its development is as necessary as society’s incessant requirement for it. It has beenreported by Oil and Gas UK that investments in oil and gas in the UK have fallen 50% over the last fiveyears [4]. Certainly, such a dilemma warrants research into the potential of alternative energy sources,including the recently discovered shale gas and an assessment of the extent of any potential Brexiteffects on its investments.

The UK is a net importer of energy, incurring a net import bill of £14.2 billion in 2017; £11.7billion in 2016 and £13.4 billion in 2015 [5]. Consequently, the Government now favours cheaper“home-grown” energy, and since 2008 has issued licenses and offered blocks in two Onshore LicensingRounds [6,7] (UKOOG 2013, OGA 2015), to companies to explore the potential of shale gas—anunconventional natural gas by hydraulic fracturing. In anticipation, a UK Parliament documentrecords that “indigenous shale gas could provide, in the medium term, an additional source of supplywhich combined with policy changes to encourage investment in generating capacity, could helpensure that competitively priced electricity supplies are maintained at an adequate level for manyyears to come” [8]. In Andrea Leadsom’s speech on shale gas in 2016 (which was published by DECC),the former Conservative Party Minister of State for Energy stated that “shale is a fantastic opportunityfor the UK”, adding it will be a transition fuel into a greener future, enable decarbonisation fromcoal consumption, strengthen the UK’s energy security and provide jobs and financial security forfamilies and tax revenues for the government [9]. The Minister added, “Unlocking the shale gas deepunderground is too big an opportunity to pass up” (ibid). Yet, to unlock the opportunity requiresinvestment by industry at a time when Brexit presents significant uncertainties for businesses andinvestment in the UK.

Unconventional oil and gas developments hold significant geological uncertainty and shale gasin particular has a slower pace for recovering investment [10]. Developing shale gas in the UK thusimplies exposure to geological and commercial risks, including potential political risks inherent inBrexit, but to what extent does Brexit impact the development (investments in) of shale gas? At theback of this reality and the enormous government optimism lies questions as to whether shale gasindeed presents as much opportunities as anticipated by the Conservative Government. Stevens [11] inhis paper on the “hype” and “reality” of shale gas revolution believes there are enormous uncertaintiesthat the shale gas revolution itself presents to investments in shale and natural gas in general andargues the benefits of shale gas have been hyped. Furthermore, the author argues that UK shale gasmay not lead to reduced gas prices to UK households [12]. May these issues justify non-developmentof shale gas in the UK?

The UK shale gas industry is relatively new but has met and continues to face significantopposition from environmentalist groups and many lawsuits [13–16], and unbalanced mediapublication that fuel public opposition against fracking [17]. Perhaps an even more excruciatingchallenge might be the possible negative implications of Brexit that could threaten the benefits ofenergy security and other anticipated significant benefits for which government and industry remainresolute to the course of shale gas exploitation. On the other hand, whether Brexit presents newer andadditional benefits to shale gas development for the UK, remains unknown although such informationwould guide policy discourse and Brexit negotiation. The current research contributes to the literature

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and discourse on UK shale gas in two ways. First, a review of the potential impacts of Brexit onshale gas investments and energy price is presented. Then, second, an assessment of the effects ofUK-produced shale gas on domestic energy price is presented. The research does not attempt to predictthe potential effects of Brexit on fracking in the UK. It does not also attempt to review or predict theUK’s energy trade agreements post-Brexit.

The rest of the paper is organised as follows: in Section 2.1, a brief background is provided toBrexit. Section 2.2 reviews the effects of Brexit on shale gas investment, whereas Section 2.3 presentspotential implications of Brexit for the regulation fracking in the UK. In Section 3, we review the UKenergy security situation in Section 3.1. Post-Brexit, tariff and non-tariff barriers could apply to tradebetween the UK and EU and indeed third countries. Section 3.2 therefore analyses some potentialissues relating to trade protectionism. In Section 4, we present the potential of commercial shalegas production for UK energy supply in Section 4.1. Importantly, Section 4.2 presents scenarios andevidences of the potential moderating effects of commercial shale gas production on gas price underhard and soft Brexit scenarios. Following, evidences and analysis of the relative trade positions of theEU and UK on natural gas via interconnection are presented along with an evaluation of the potentialimpact on UK gas supply and price in Section 4.3. Section 4.4 reviews the impact of Brexit on wholesaleand retail energy prices, whilst Section 5 concludes the research with some recommendations.

2. Brexit and Shale Gas Investment

2.1. Brexit: Background and Definitions

On the 23rd of June 2016 the United Kingdom voted to exit the European Union (EU) in a generalreferendum where 52% of British voters supported the exit from the EU. This event is now popularlyreferred to as “Brexit”. To proceed with the withdrawal process, the UK invoked Article 50 of the EULisbon Treaty on 29th March 2017 giving the UK a two-year period to negotiate. As it stands, the UK isexpected to exit the EU at 11 pm UK time on Friday 29th March 2019 although, with the agreement ofthe member states, the date can be extended.

The exit of a member state is unprecedented in the history of the EU and therefore Brexit camewith significant uncertainties causing an initial financial maelstrom that left the Pound Sterling loosingvalue against major global currencies. Also, the uncertainties caused a slowdown of the economicgrowth and productivity of the UK [18]. The exit negotiation is currently ongoing, and it remainsuncertain whether or not a deal will be reached by March 2019.

2.2. Effects of Brexit on Investment in Shale Gas

The UK North Sea has been struggling to attract new investments since peaking in 1999 and 2001for oil and gas production respectively, yet from 2004 as in Figure 1, the oil and gas industry wasmaking modest but steady growth in investments until 2014, when investments took a steep decline.Obvious responsible factors include the matured nature of the basin and increasing costs typical ofmature basins, and the falling crude oil price in 2014, which led to the postponement and cancellationof capital projects by most E&P companies [19–21]. Nonetheless, analysing investments in the entireenergy industry reveals there are more responsible factors, potentially political, and chief of which isBrexit and its attendant uncertainty. In 2017, investments in the energy industries grew at just 0.6%overall, with most of this in electricity at 60%; 30% in oil and gas extraction; 7.5% in gas and theremainder for coal, coke and refined petroleum products [5].

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years ago to over $70 a barrel in 2018, “drilling activity in the North Sea has remained at record low levels, having fallen 50 per cent over the past five years to become “a serious concern” [4].

Figure 1. Investments in the UK Energy Industry from 2004 to 2017, showing a declining trend of investments in the last four years.

In 2018, only four exploratory wells were drilled between January and August, the lowest record since 1965. Meanwhile shale gas company Cuadrilla is said to have spent over £100 million on its first fracked well with no revenues yet [22]. At the same time, it is argued that the slow progress of fracking in the UK owing to environmentalist groups’ pressure activity, the incidence of lawsuits against fracking companies, and local authorities’ reluctance to approve planning requests by fracking companies have cost the industry lots of their risk capital. It is reported that Cuadrilla, the leading giant of the UK’s fracking industry, has only just managed to reduce its losses to $11.54m in 2016 from $17.7m in 2015 via a $5.5m reduction in operating and administrative expenses [22].

For shale gas, it would appear that three factors–negative public perception, uncommercial production and Brexit are immediately responsible for the current level of investments. First, the intrinsic uncertainty about recoverable volumes and satisfactory economics of the nascent fracking industry is enough to ‘put investors off’. The likely success of fracking in the UK is still unknown and investor fears of losing their investments are apparently starving the fracking industry of investments. We argue that negative investor behaviour and attitude towards UK fracking is further exacerbated by the freely available information about the “collapse of shale gas prospects…” in Poland [23] as Poland offers an unfortunate but perfect example of the potential instability of the new fracking industry of the UK. In Poland, wells were drilled and gas flowed, but rock fractures quickly closed, and reduced gas flow to a trickle, and necessitated a halt to operations [23]. The consequence of this geological and fiscal failure for Poland has been witnessed as falling investments since 2015 with US oil and gas giants ExxonMobil, Chevron and Marathon Oil, all walking away from Poland [24–26]. In the UK, some investment analysts believe investing in fracking is far from safe and the investing public has this information freely available [23,27,28]. Indeed, the London Stock Exchange LSE has listed publicly traded shale gas companies, including iGas, at the riskier end of the markets on its Alternative Investments Markets (AIM), making it a less likely investment option for most investors. The fracking industry, in a consultative meeting with the DBEIS Minister has expressed difficulty in obtaining funding from British banks, due to negative public views of fracking [29]. Consequently, in the UK fracking capital comes from foreign investors or from private investors [29], a big contrast to the situation in the US, China or Canada. The UK lost major oil and gas companies potentially major public company investors BP, Shell, Total, Centrica, among other companies in 2015 as they surrendered a whopping 56% of fracking licences awarded them in the 14th Onshore Licensing Round, some for reasons of unconvincing geological results [30]. Thus, whilst there is

Figure 1. Investments in the UK Energy Industry from 2004 to 2017, showing a declining trend ofinvestments in the last four years.

From the overall investments data recently released by the Office for National Statistics [5], it isapparent that there is a general decline in investments in energy. Hence, whilst Brexit may not beexpressly blamed for this trend, it appears that blaming this situation on the recent decline in oil pricesof 2014 alone might be a costly simplification of the causal factors and lead to an eluded solution to theproblem. For instance, even with oil price recovering from below $30 a barrel a few years ago to over$70 a barrel in 2018, “drilling activity in the North Sea has remained at record low levels, having fallen50 per cent over the past five years to become “a serious concern” [4].

In 2018, only four exploratory wells were drilled between January and August, the lowest recordsince 1965. Meanwhile shale gas company Cuadrilla is said to have spent over £100 million on itsfirst fracked well with no revenues yet [22]. At the same time, it is argued that the slow progressof fracking in the UK owing to environmentalist groups’ pressure activity, the incidence of lawsuitsagainst fracking companies, and local authorities’ reluctance to approve planning requests by frackingcompanies have cost the industry lots of their risk capital. It is reported that Cuadrilla, the leadinggiant of the UK’s fracking industry, has only just managed to reduce its losses to $11.54m in 2016 from$17.7m in 2015 via a $5.5m reduction in operating and administrative expenses [22].

For shale gas, it would appear that three factors–negative public perception, uncommercialproduction and Brexit are immediately responsible for the current level of investments. First,the intrinsic uncertainty about recoverable volumes and satisfactory economics of the nascent frackingindustry is enough to ‘put investors off’. The likely success of fracking in the UK is still unknown andinvestor fears of losing their investments are apparently starving the fracking industry of investments.We argue that negative investor behaviour and attitude towards UK fracking is further exacerbatedby the freely available information about the “collapse of shale gas prospects . . . ” in Poland [23]as Poland offers an unfortunate but perfect example of the potential instability of the new frackingindustry of the UK. In Poland, wells were drilled and gas flowed, but rock fractures quickly closed,and reduced gas flow to a trickle, and necessitated a halt to operations [23]. The consequence of thisgeological and fiscal failure for Poland has been witnessed as falling investments since 2015 with USoil and gas giants ExxonMobil, Chevron and Marathon Oil, all walking away from Poland [24–26].In the UK, some investment analysts believe investing in fracking is far from safe and the investingpublic has this information freely available [23,27,28]. Indeed, the London Stock Exchange LSE haslisted publicly traded shale gas companies, including iGas, at the riskier end of the markets on itsAlternative Investments Markets (AIM), making it a less likely investment option for most investors.The fracking industry, in a consultative meeting with the DBEIS Minister has expressed difficulty inobtaining funding from British banks, due to negative public views of fracking [29]. Consequently,in the UK fracking capital comes from foreign investors or from private investors [29], a big contrast to

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the situation in the US, China or Canada. The UK lost major oil and gas companies potentially majorpublic company investors BP, Shell, Total, Centrica, among other companies in 2015 as they surrendereda whopping 56% of fracking licences awarded them in the 14th Onshore Licensing Round, some forreasons of unconvincing geological results [30]. Thus, whilst there is geological uncertainty aboutfracking in the UK, the combined effect of this and unfavourable public perception of the technology,appears to be starving the nascent shale industry of capital required to fund mass development thatcould revolutionise natural gas production in the UK.

Secondly Brexit, it is believed presents lots of uncertainty about the future of businesses in theUK [31]. The Financial Times estimates, based on the OFNS data, that between 2015 and the firstquarter of 2018, the UK recorded £27.8 billion less business investment, noting the general growthof business investments slowed from an average of 5.2% prior to 2015 to only 2.6% per annum after2015 [3]. The analysis also reveals the UK oil and gas sector grew 5% per annum between 1999 and 2010and peaked at 9% in 2013. Nonetheless, following the 2014 oil price crash, business investment growthreceded to just below 0.9% per annum. Assuming investments in the oil and gas sector continued atthe 2013 average, business investments between 2015 and the first quarter of 2018 would have been£25.8 billion more than it currently stands, explaining nearly all the underinvestment, and suggestingBrexit may not be blamed immediately for the underinvestment.

However, as Professor Mizen of Nottingham University puts it “ . . . the shadow of Brexit is stillhanging over UK businesses” [32,33] and cannot be removed from any analysis of possible factors forthe UK’s slowed business investments. Whilst there is no direct data that suggests Brexit has negativelyaffected investments in shale gas, it is apparent that the sheer uncertainty that accompanies Brexit mayhave induced a significant amount of investor aversion to UK businesses which could have affectedshale gas investments too. In fact, some economists argue that had it not been the perceived risksinduced by Brexit, general business investments, including in shale gas, would have grown more thanit currently stands [3]. This hypothesis is consistent with theories on UK foreign direct investment (FDI)post-Brexit, predicting an apparent loss of FDI ranging 14% to 38%. FDI explains investments fromoutside a country by mostly multinationals to start new businesses, expand established businesses oracquire domestic companies. It is reported the UK’s stock value of FDI is about £1 trillion and about50% of this comes from EU member states UKTI [34] and Dhingra et al. [35,36] report the UK’s EUmembership has increased its FDI by 28%. Relatedly Welfens and Baier [37] find empirical evidence tosuggest the UK will have reduced FDI post-Brexit.

For oil and gas investments, political factors and an unstable investment climate have been foundto increase investor risk premium of doing business [38–42]. Although, the oil and gas business isglobal in nature and companies do operate in politically unstable regions of the world, these regionshave been cited to have prolific reserves potential which supports company business cases, to takeon the higher than normal risks of developing hydrocarbons there. Given the shadows of Brexit areover UK businesses, and the grave uncertainty about recoverable reserves of shale gas in particular,it is likely true the UK may be riskier for shale gas investments as suggested by investment analysts.Geological uncertainty may only be reduced with exploratory drilling. However, exploratory drillingrequires investment, yet Brexit may have increased investor risk premiums for shale gas and potentialfracking investors may have reflected such risks in their economic models, which would most likelyrender the investments more expensive and less viable. The Financial Times [3] notes that perceptionsof a “no deal” Brexit are growing and have been raising the cost of financing for companies, whilstthe Governor of the Bank of England, Mark Carney, has argued that business investments wouldhave accelerated significantly, if not for the negative effects of Brexit. We argued on the back of theseevidences that the current Brexit climate may have deprived the UK fracking industry of additionalinvestments and that a quick conclusion of Brexit negotiation is as necessary as a favourable Brexitdeal to boost shale gas investments, if the UK is to fully commercialise its natural gas from tightshale formations.

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2.3. Brexit and Regulation of UK Fracking

Fracking is heavily regulated in the UK. There is a visible presence of government machineryto oversee the permitting for exploration, development and production of oil and gas including theregulation of all aspects of the commercial production of shale gas [43]. The Oil and Gas Authority(OGA) (Department of Enterprise, Trade and Investment—DETI for Northern Ireland) regulatesupstream oil and gas activities and grants consents to companies for onshore oil and gas operations,along with a host of other government institutions that oversee health, safety and environmentalissues, infrastructural issues, and community matters regarding fracking. Responsibility for licensingonshore oil and gas operations in Scotland passed to the Scottish Minister on 9 February 2018. Frackingis currently most active in England out of all the UK countries and the analyses of this paper majorlyrelate to England. The Infrastructure Act 2015 simplifies the procedure for obtaining onshore oiland gas exploitation licence [43] and the DECC’s [44] report on shale gas exploitation in the UKcontains a comprehensive presentation on the regulation of UK shale gas along with best practice.These regulations are nonetheless inspired by the EU legislation that authorise the prospection anddevelopment of hydrocarbons in the Member States albeit the competence to find and exploit suitableenergy sources rests with the Member States and not the EU [45]. There are varying amounts ofpotential shale gas reserves in the European Member States and members of the EU do not agreeon the benefits and disbenefits and hence the approach to regulating shale gas exploitation in theUnion [45]. Some members have thus cancelled and or banned fracking licences and operations,but others are still exploring for shale gas, the latter includes the UK. There is no evidence of a strongregulatory influence of the UK’s fracking industry from the EU as much as there is of UK Governmentinstitutions including local authorities. The same EU laws that apply to exploration and exploitation ofconventional hydrocarbons apply to fracking [45]. Perhaps the most crucial declaration and influencethe EU’s fracking policy may have on UK fracking is the requirement of fracking companies to declarethe composition of fracking fluids to the public, but this is part of non-binding recommendationsadopted by the European Commission in January 2014 for the development of shale gas [46]. Whilst,these recommendations mostly relate to environmental aspects of fracking, the UK public and thegovernment are perhaps as vigilant in this area as the EU itself and it is unlikely that any aspect of theexisting environmental protocols will change significantly due to Brexit.

3. UK Energy Security Implications

3.1. UK Energy Security Situation

Natural gas is essential in the UK’s energy mix as eight out of 10 homes use gas for heating and itis an essential feed stock for manufacturing industries. Three TCF of natural gas is consumed in theUK annually, accounting for a third of the UK’s energy supply [47]. UK gas consumption has morethan doubled since the 1990s [11]. Currently, at least 40% of electricity generation is from gas (Figure 2).Meanwhile, domestic production of natural gas has declined steadily since the 1990s, exposing the UKto high volumes of natural gas imports annually. In 2017, the overall net energy imports were 36%;with natural gas and crude oil making 90% of total energy imports [5,48,49]. Island Gas [43] notes thatthe UK currently imports 50% of its gas consumption while the Oil and Gas Authority (OGA) projectsthat gas imports into the UK could exceed 70% of total gas consumption by 2030 [46]. In 2017, 75% ofgas imports came from Norway, 10% from Belgium and Holland and 15% LNG—84% of which camefrom Qatar [5]. As shown in Figure 2, natural gas is by far the largest source of electricity in the UK.

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Figure 2. Relative share of natural gas in UK electricity production.

The UK government is thus optimistic that a replication of the US shale gas revolution in the United Kingdom will increase domestic gas supplies, reduce gas imports, reduce domestic gas prices and generally increase energy security [10,50]. Consequently, the UK government has declared Shale gas development a national priority [50]. Figure 2 showing the UK’s dependence on natural gas at 40% for its electricity generation and its need for continued supplies [5].

Figure 3. UK Energy Import Dependency from 1970 to 2017 [5].

The UK’s widening energy import dependency (Figure 3) should be a cause for concern about the security of supplies, and the cost of natural gas and electricity to UK residents and UK businesses. In 2017 alone, prices increased on all fuels for both industrial and domestic users – electricity and gas prices rose 3.5% and 4%, albeit a decrease of 9.9% over the last five years. From 2007 to 2017, real gas and electricity prices increased by 32% and 35% respectively [5]. Fundamentally, the price of most fuels are influenced by crude oil prices [51,52]. Brent crude oil prices have remained relatively low between $44 and $54 in 2016 and 2017 respectively [5]. It is argued that a rise in Brent crude oil prices will sure drag natural gas prices higher, implying an even higher cost of energy for UK businesses and households. Between January and July 2018, Brent crude oil prices averaged over $70 a barrel [53] and it saw natural gas prices increase over the same period (Figure 4).

The reverse is however unlikely as it has been noted that a reduction in crude oil prices since 2012 increased both domestic and industrial energy bills, except for industrial gas bills which fell by 29% [5]. In the UK the Government’s public attitude tracker survey 21 (WAVE PAT 21), stated it was reported that 30% of UK households expressed worry about paying for their energy bills which had increased 28% from 2016 to May 2017 [54]. Nonetheless, it appears that declining domestic energy


The UK government is thus optimistic that a replication of the US shale gas revolution in theUnited Kingdom will increase domestic gas supplies, reduce gas imports, reduce domestic gas pricesand generally increase energy security [10,50]. Consequently, the UK government has declared Shalegas development a national priority [50]. Figure 2 showing the UK’s dependence on natural gas at 40%for its electricity generation and its need for continued supplies [5].

The UK’s widening energy import dependency (Figure 3) should be a cause for concern aboutthe security of supplies, and the cost of natural gas and electricity to UK residents and UK businesses.In 2017 alone, prices increased on all fuels for both industrial and domestic users—electricity and gasprices rose 3.5% and 4%, albeit a decrease of 9.9% over the last five years. From 2007 to 2017, real gasand electricity prices increased by 32% and 35% respectively [5]. Fundamentally, the price of mostfuels are influenced by crude oil prices [51,52]. Brent crude oil prices have remained relatively lowbetween $44 and $54 in 2016 and 2017 respectively [5]. It is argued that a rise in Brent crude oil priceswill sure drag natural gas prices higher, implying an even higher cost of energy for UK businesses andhouseholds. Between January and July 2018, Brent crude oil prices averaged over $70 a barrel [53] andit saw natural gas prices increase over the same period (Figure 4).




The UK government is thus optimistic that a replication of the US shale gas revolution in the United Kingdom will increase domestic gas supplies, reduce gas imports, reduce domestic gas prices and generally increase energy security [10,50]. Consequently, the UK government has declared Shale gas development a national priority [50]. Figure 2 showing the UK’s dependence on natural gas at 40% for its electricity generation and its need for continued supplies [5].


The UK’s widening energy import dependency (Figure 3) should be a cause for concern about the security of supplies, and the cost of natural gas and electricity to UK residents and UK businesses. In 2017 alone, prices increased on all fuels for both industrial and domestic users – electricity and gas prices rose 3.5% and 4%, albeit a decrease of 9.9% over the last five years. From 2007 to 2017, real gas and electricity prices increased by 32% and 35% respectively [5]. Fundamentally, the price of most fuels are influenced by crude oil prices [51,52]. Brent crude oil prices have remained relatively low between $44 and $54 in 2016 and 2017 respectively [5]. It is argued that a rise in Brent crude oil prices will sure drag natural gas prices higher, implying an even higher cost of energy for UK businesses and households. Between January and July 2018, Brent crude oil prices averaged over $70 a barrel [53] and it saw natural gas prices increase over the same period (Figure 4).

The reverse is however unlikely as it has been noted that a reduction in crude oil prices since 2012 increased both domestic and industrial energy bills, except for industrial gas bills which fell by 29% [5]. In the UK the Government’s public attitude tracker survey 21 (WAVE PAT 21), stated it was reported that 30% of UK households expressed worry about paying for their energy bills which had increased 28% from 2016 to May 2017 [54]. Nonetheless, it appears that declining domestic energy


The reverse is however unlikely as it has been noted that a reduction in crude oil prices since 2012increased both domestic and industrial energy bills, except for industrial gas bills which fell by 29% [5].In the UK the Government’s public attitude tracker survey 21 (WAVE PAT 21), stated it was reportedthat 30% of UK households expressed worry about paying for their energy bills which had increased28% from 2016 to May 2017 [54]. Nonetheless, it appears that declining domestic energy productionvis-à-vis attendant increasing imports of energy is the responsible factor and it seems energy bills are

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set to continue to increase except with the intervention of significant domestic production of energy inthe UK.



production vis-à-vis attendant increasing imports of energy is the responsible factor and it seems energy bills are set to continue to increase except with the intervention of significant domestic production of energy in the UK.

Figure 4. A 2-Year Natural Gas Prices (Oct 2016‒July 2018): September 2018 UK Natural Gas Futures, Showing UK natural gas prices traded less than £0.45 per therm for a large proportion of the last 2 years. Source: [55].

3.2. Brexit and Effects of Trade Protectionism

The UK’s cross border trade in energy with the EU Member States is easier and cheaper due to its membership of the Union and the Internal Energy Market. Thus, there are no tariff or non-tariff trade barriers between the UK and EU but Brexit could change this as well as the UK’s trade relationship with non-EU countries. Should the UK opt to trade energy with the EU following a hard Brexit, protection barriers may apply to a host of trade transactions, including energy and this may render energy and energy related imports from the EU more expensive [56].

The European Commission (EC) under its Market Access Strategy (MAS) along with the Market Access Partnership (MAP), identifies trade barriers, negotiates and seeks to induce policy change by its trade partners so as to ease access by its member states into third countries for the purposes of doing business. In 2017, the EC reports that it partly or fully removed 45 trade obstacles through its enhanced MAS. This was more than twice the number removed in 2016. Additionally, in 2016 36 new trade restrictions that could have cost the Union some Euro 27.17 billion in exports were removed. These savings were estimated at Euros 8.2 billion in 2017 [57,58]. Trade barriers in 2017 spanned 13 EU trade and investment sectors and covered aircraft, automotive, ceramics, ICT and electronics, machinery, pharma, medical devices, textiles, leather, agri-food, steel, paper, and services sectors. As a result of the removal of barriers between 2014 and 2016, the EU was able to earn additional Euros 4.8 billion in from exports in 2017 but at the same time, in 2017, 67 new trade obstacles were recorded, raising the total number of protectionist trade barriers to a whopping 396 across 57 EU trade partners. Russia and China are recorded to have the highest number of trade protectionist instruments at 36 and 25 respectively as in Table 1.

Table 1. Top Ten Trade Barriers Against EU Countries in 2016 and 2017 by Country [57,58].

No. 2016 2017

Country No. of Barrier Measures

Country No. of Barrier Measures 1 Russia 33 Russia 36 2 Brazil 23 China 25 3 China 23 Indonesia 23 4 India 23 India 21 5 Indonesia 17 Brazil 21 6 South Korea 17 South Korea 20 7 Argentina 16 Turkey 20

Figure 4. A 2-Year Natural Gas Prices (October 2016–July 2018): September 2018 UK Natural GasFutures, Showing UK natural gas prices traded less than £0.45 per therm for a large proportion of thelast 2 years. Source: [55].

3.2. Brexit and Effects of Trade Protectionism

The UK’s cross border trade in energy with the EU Member States is easier and cheaper due to itsmembership of the Union and the Internal Energy Market. Thus, there are no tariff or non-tariff tradebarriers between the UK and EU but Brexit could change this as well as the UK’s trade relationshipwith non-EU countries. Should the UK opt to trade energy with the EU following a hard Brexit,protection barriers may apply to a host of trade transactions, including energy and this may renderenergy and energy related imports from the EU more expensive [56].

The European Commission (EC) under its Market Access Strategy (MAS) along with the MarketAccess Partnership (MAP), identifies trade barriers, negotiates and seeks to induce policy change by itstrade partners so as to ease access by its member states into third countries for the purposes of doingbusiness. In 2017, the EC reports that it partly or fully removed 45 trade obstacles through its enhancedMAS. This was more than twice the number removed in 2016. Additionally, in 2016 36 new traderestrictions that could have cost the Union some Euro 27.17 billion in exports were removed. Thesesavings were estimated at Euros 8.2 billion in 2017 [57,58]. Trade barriers in 2017 spanned 13 EU tradeand investment sectors and covered aircraft, automotive, ceramics, ICT and electronics, machinery,pharma, medical devices, textiles, leather, agri-food, steel, paper, and services sectors. As a result ofthe removal of barriers between 2014 and 2016, the EU was able to earn additional Euros 4.8 billion infrom exports in 2017 but at the same time, in 2017, 67 new trade obstacles were recorded, raising thetotal number of protectionist trade barriers to a whopping 396 across 57 EU trade partners. Russiaand China are recorded to have the highest number of trade protectionist instruments at 36 and 25respectively as in Table 1.

China does not appear to be a great threat to a potential UK bilateral relation, but Russia does.Russia currently has a strained relationship with the UK, EU, US and other coordinated Westernallies, for its “destabilisation of Ukraine and annexation of Crimea” [59] and more recently its allegedconnection with the Salisbury attack of March 8th, 2018 in the UK. Table 1 shows Russia has consistentlyheld the most trade barrier instruments against EU trade partners and that it could raise new tradebarriers against the UK post-Brexit, due to the latter’s lost privileges from the EU MAS.

UK does import LNG from Russia and due to stressed relations and tensions, fresh traderestrictions could be introduced between the UK and Russia post-Brexit, especially if the MAS nolonger shields the UK. Such could increase the import cost of Russian natural gas. Nonetheless,UK imports less than 1.5% of her natural gas from Russia in 2018 compared with Europe’s imports of37% in 2016 from Russia [60,61], and that could prove to be a great relief the UK. On the other hand,the UK could cease to provide a market for Russian LNG and replace this proportion of LNG imports

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with imports from trade partners such as Qatar, Malaysia or even Australia. Together, the coordinatedmove by the EU, US and other Western allies have many trade barriers and sanctions against Russianindividuals and corporations, including three oil and gas companies until 31st July 2018. In reaction tothe Salisbury attack, 25 countries expelled 130 Russian diplomats and the EU Ambassador to Russiawas withdrawn [59].

Table 1. Top Ten Trade Barriers Against EU Countries in 2016 and 2017 by Country [57,58].

No.2016 2017

Country No. of Barrier Measures Country No. of Barrier Measures

1 Russia 33 Russia 362 Brazil 23 China 253 China 23 Indonesia 234 India 23 India 215 Indonesia 17 Brazil 216 South Korea 17 South Korea 207 Argentina 16 Turkey 208 USA 16 USA 209 Turkey 15 Australia 14

10 Australia 13 Thailand 12

The UK has been a beneficiary of such privileges as a member of the EU. Post Brexit, suchbenefits could be removed. On the other hand, this would accord the UK the opportunity to crafther own energy policy with domestic priorities, including protectionist strategy/ policy both forits trade relationship with the EU and other trade partners it may identify, without the burden ofcurrent EU restrictions. For example, the UK may lose the Inter State Aid but this grants her theopportunity to “target her energy policy support at energy generation technologies without the Stateaid restrictions” [56]. The House of Lords’ ESC report on Brexit and Energy Security presents detailedevidences on tariff and non-tariff tools that could apply post-Brexit but which fall outside of the scopeof this research. For UK fracking, it does not appear that protectionism by the EU or other countrieswill pose a great threat to the industry. For example, the EU’s average tariff on industrial goods is onlyabout 2.3% [62]. Such, is not expected to cause significant changes to current investments in fracking.

4. The Moderating Effects of Shale Gas on UK Energy Price

4.1. The Potential of Shale Gas for the UK and Gov’t Expectation

Recoverable volumes of shale gas in the UK are uncertain and depend on the results of exploratorywell drilling. The British Geological Survey’s (BGS) current estimates of the geological potential ofshale oil and shale gas within the UK stand at 1,419.6 Tcf and 11.5 billion bbl respectively and coverparts of England, Scotland and a small area of Wales in the Upper Bowland Hodder. Table 2 presentsthe BGS’s estimates of in-place shale gas and oil in the UK.

Table 2. P50 Estimates of Shale Gas and Oil Resources in the UK [63].

BasinShale Gas (Tcf) Shale Oil, (Billion bbl) Date

AnnouncedP10 P50 P90 P10 P50 P90

Bowland Shale 2281 1329 822 - 27-Jul-13Midland Valley of Scotland Shale 134.6 80.3 49.4 11.2 6.0 3.2 30-Jun-14Jurassic Shale of the Weald Basin - 4.4 23-May-14Jurassic Shale of the Wessex Area - 1.1 -

Wales 10.3 26-Jun-14Total 1419.6 11.5

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The former Conservative Prime Minister, David Cameron in underscoring the Government’sexpectations from shale gas is reported to have indicated that recovering just 10% of the BowlandShale alone, could supply about 51 years of the UK’s natural gas demand [5]. Meanwhile CuadrillaResources Ltd., the operator of the Bowland shale estimates a central annual production rate fromthe Bowland shale alone to be 3.5 billion cubic metres (Bcm) [64]. If these estimates are anythinggood to go by, it would be a significant facelift to UK energy supply and security. The US EIA [65]believes that 26 Tcf of the UK’s shale gas is technically recoverable. The IoD shares the optimismfor shale gas extraction and projects that producing the UK’s shale gas could result in as much as 39per cent reduction (from 76% to 37%) in natural gas import by 2030, and reduce the Government’snatural gas imports bill from £15.6 billion to £7.5 billion, saving some £7.5 billion, in 2012 prices [66].The economic savings by households and industrial electricity and gas users from such a significantshale gas production would be enormous. As an example, between 1980 and 2000, a rapid increase indomestic natural gas and crude oil production kept domestic and industrial electricity and gas bills atrecord low levels [5]. The DBEIS again reports that gas and electricity prices more than doubled overthe period from 2002 to 2016, except for 2016 when prices decreased due to increased domestic gasproduction [5,67–69]. The period 2002 to 2016, coincides with the peaking and subsequent falling ofNorth Sea production and consequently increased imports from -11 % in the year 2000 to an average to47% gas imports in 2016 (see Table 3). Both domestic and industrial gas and electric bills have been onan upward trajectory since 2004 [70] .In 2016 however, industrial gas and electricity prices decreased17% and 4% respectively whilst domestic prices fell 7.5% for gas and 1.9% for electricity over 2015(Tables 4 and 5). These price reductions were linked to the start-up of the Laggan and Cygnus gasfields in mid-2016 and December 2016 respectively to contribute 6.5% to domestic gas production [67]).The Laggan gas field is projected to contribute between 5% and 10% to “all UK production in thenext few years” [67]). By extension, significant domestic production, whether from conventionalor unconventional sources, will have varying degrees of moderating effects on both domestic andindustrial energy prices, and thus contradict hypotheses that shale gas will not lead to reduced UK gasprice [71] (Roger 2013). It would therefore be safe to indicate that a significant shale gas productionshould reduce domestic gas and electricity prices. Such reasoning is consistent with predictions ofreduced UK gas prices upon commercial production of shale gas [8,66]).

Table 3. Average (percentage) Net imports of Natural Gas at c.35% from 2000 to 2016 (Percent) a.

Fuel 2000 2010 2013 2014 2015 2016 6-Year Average

Coal 39 52 84 87 60 46 61Gas −11 40 52 47 43 47 36Oil 55 14 40 43 37 34 37

Total −17 29 48 47 38 36 30a Table 3 shows the average natural gas imports for six years, showing the UK imported on average, 36% of hernatural gas over the period indicated. With IoD estimates and Government expectations of shale gas production,the UK’s natural gas import dependency could be resolved to reduce domestic and industrial gas and electricityprices considerably [67].

Table 4. Real Industrial UK Energy Prices (Including VAT) from 1996 to 2016, with 2010 = 100. Source:[67]).

Fuel 1990 2000 2010 2015 2016

Coal 99.1 62.7 100.0 93.4 86.1Electricity 84.1 60.0 100.0 112.3 107.9

Gas 72.4 45.4 100.0 110.4 91.7Heavy Fuel Oil 25.9 33.3 100.0 70.7 69.5

Industrial Prices 74.4 51.9 100.0 105.2 98.7

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Table 5. Real Domestic UK Energy Prices (Including VAT) from 1996 to 2016, with 2010 = 100. Source:[67].

Fuel 1996 2000 2005 2010 2015 2016

Solid Fuels 62.4 61.0 70.8 100.0 105.2 103.2Electricity 86.4 70.3 73.9 100.0 118.7 116.4

Gas 59.9 52.0 63.3 100.0 122.3 113.1Liquid Fuels 48.4 55.1 74.0 100.0 75.8 66.5

Domestic Fuels 71.5 61.6 69.4 100.0 119.0 113.5

The UK Onshore Operators’ Group, UKOOG, notes that shale gas will help reduce the UK’scarbon footprint as it will displace coal production in the energy mix [8]

4.2. Brexit, Energy Price and the Role of Shale Gas

In the US, the share of shale gas in the energy mix, rose from 1% to 20% in 10 years, from2000 to 2010 according to Stevens [12]. In 2016, the EIA believes that 15.8 Tcf of dry natural gaswas produced from shale and tight oil resources, accounting for about 60% of US dry natural gasproduction; 81.1 Bcfd in 2018 [72,73]. The benefits from shale gas in the US have been reaped in theform of reduced electricity and gas prices, even in the face of increasing gas consumption, job creation,etc. [74]. For example, the average Henry Hub gas price from 2015 to Nov 2017 was less than $3 permillion Btu [75]. Consequently, the US government anticipates supporting the unconventional gasindustry in order to sustain lower gas prices from the impact of shale and tight gas production.

Uncertainty surrounds the UK’s shale gas estimates at this early stage, and this has resultedin mixed anticipation of its potential contribution to the UK economy, businesses and households.Nonetheless, from a purely economic standpoint, it is possible to characterise the conditions underwhich the potential benefits of shale gas production may or may not be derived. Following basic lawsof demand and supply, a hard Brexit is expected to lock in outflows of UK produced shale gas intothe EU’s Internal Energy Market (IEM), where it could otherwise sell at a higher price and ultimatelyremove the benefits of cheaper gas prices from UK residents. In essence, similar to the implicationsof US shale gas, of excess natural gas supply, LNG capacity utilisation growth and lower gas prices;UK shale gas could cause an additional supply of natural gas at least within the UK, and force gasprices downwards and consequently reduce energy prices. It is to be noted however, that Stevens [11]warns such theory only holds true under a UK-only gas market; and by implication under a HardBrexit only that presents a closed energy market, one similar to the US’s energy market structurewhich essentially locks immediate additional gas supply to a UK–only market. Stevens [12] explainsthat as the UK gas price falls, the country’s physical connection to the European Gas Market via theBatcon interconnector could encourage arbitrage as market participants look to trade cheaper UK gasin the higher- price European gas markets, which eventually would push UK gas prices up. This iswhy the author believes that the theory that shale gas would decrease UK gas prices is a myth. Thus,a soft Brexit would render the benefits of reduced gas and electricity prices an illusion. Nonetheless,the analytical review in the section on IEM and Energy prices extends this discussion and characterisesthe conditions under which shale gas may or may not reduce energy prices.

4.3. The IEM, Natural Gas Trade and UK Energy Supply and Prices Post Brexit

The EU’s Internal Energy Market (IEM), introduced in 1988, aimed at facilitating free trade,particularly the energy trade within the EU [76]. Currently, the IEM rules permit the use of cross-borderinfrastructure to facilitate the import and export of energy produced in member states without theburden of transport tariffs being applied [77]. Thus, consumers of energy in EU member states maypay lower, all things equal, for energy under IEM arrangements. The UK imports about 60% of itsenergy. Except for gas, imports of all energy types declined in 2016. In 2016, 65% of the UK gasimport was from Norway’s Continental Shelf [67,78]. Of the UK’s gas import of 532 TWh in 2016,

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an insignificant amount was imported from the interconnector via Belgium in the last ten years to2017 and the combined UK import of natural gas from interconnectors, including the Netherlandswere found to be much lower than the total exports of natural gas from the UK into Europe as seen inFigure 5. The evidence suggests that the UK exported on average 5,191 GWh of natural gas to Europevia interconnectors. This significant net export to the EU as in Figure 5, would stay within the local UKgas market to boost domestic supply and fill local demand gaps should the UK opt out of the IEMpost-Brexit. As seen in Figure 5, there has been an upward trajectory of net natural gas exports fromthe UK into Europe since 2012—an important revelation of the relative positions of the EU and UK onenergy trade. We argue on the back of this evidence that an increase in domestic gas supply from shalegas production, which would result in additional supply will put downward pressure on natural gasprices, a major source of electricity production in the UK and thereby reduce industrial and householdenergy prices/bills.



Figure 5. The evidence suggests that the UK exported on average 5,191 GWh of natural gas to Europe via interconnectors. This significant net export to the EU as in Figure 5, would stay within the local UK gas market to boost domestic supply and fill local demand gaps should the UK opt out of the IEM post-Brexit. As seen in Figure 5, there has been an upward trajectory of net natural gas exports from the UK into Europe since 2012 – an important revelation of the relative positions of the EU and UK on energy trade. We argue on the back of this evidence that an increase in domestic gas supply from shale gas production, which would result in additional supply will put downward pressure on natural gas prices, a major source of electricity production in the UK and thereby reduce industrial and household energy prices/ bills.

Figure 5. The UK’s Import and Export of Natural Gas via the Belgium and Netherlands from 2008 to 2017. (b Net Pipeline trade of natural gas via interconnectors showing that the UK in the last 10 years has exported more natural gas to Europe (an average of 5191 GWh per year) than it has imported. This evidence supports the argument that post-Brexit, the UK will benefit from any additional domestic natural gas production from shale through reduced energy prices. Source: [79])

It is believed that shale gas will lead to reduced energy prices for the UK [80] but there are others who suggest this is not the case [11,12,71]). Commercial extraction of shale gas in the UK has not started yet, but it is possible to characterise the conditions under which shale gas production could influence energy prices. Also, although it has not left the IEM yet, it is possible to draw lessons from the US experience and also characterise what is likely obtainable in the UK based on the evidence available on UK natural gas. Indeed, the UK shale gas industry and government institutions have relied on such analysis to construct an envelope of likely obtainable benefits from shale gas in the UK [63,81]. For, example IoD 66], suggests among other advantages and benefits, that shale gas has the potential to reduce the UK’s import dependency to just 36%, a drastic reduction from 76% without shale gas production. This conclusion again contradicts popular studies such as Stevens [11,12] and Rogers [71] who believe import levels and prices are unlikely to change due to shale gas production.

US shale gas revolution has changed world energy flows. As reported by the US EIA [73] the US is a net exporter of natural gas. Consequently, there is now more liquified natural gas LNG available for European and Asian markets. This surplus is in addition to US net exports of NG which averaged 0.3 Bcfd in 2017 and is forecast to increase to 2 Bcfd in 2018 and 5.4 Bcfd in 2019 [73]. In addition, the US now exports more coal to Europe and Asia because this portion has been replaced by natural gas from shale, for electricity generation [82]. The increased availability of LNG in Asian and European markets without a doubt does have an effect on prices in those markets.

-100,000

-50,000

-

50,000

100,000

150,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

GWh

Year

Net Export of Natural Gas from the UK to Belgium and Netherlands from 2008 to 2017b

Imp Exp Net Exp Linear (Net Exp)

Figure 5. The UK’s Import and Export of Natural Gas via the Belgium and Netherlands from 2008 to2017. (b Net Pipeline trade of natural gas via interconnectors showing that the UK in the last 10 yearshas exported more natural gas to Europe (an average of 5191 GWh per year) than it has imported. Thisevidence supports the argument that post-Brexit, the UK will benefit from any additional domesticnatural gas production from shale through reduced energy prices. Source: [79])

It is believed that shale gas will lead to reduced energy prices for the UK [80] but there are otherswho suggest this is not the case [11,12,71]). Commercial extraction of shale gas in the UK has notstarted yet, but it is possible to characterise the conditions under which shale gas production couldinfluence energy prices. Also, although it has not left the IEM yet, it is possible to draw lessons fromthe US experience and also characterise what is likely obtainable in the UK based on the evidenceavailable on UK natural gas. Indeed, the UK shale gas industry and government institutions haverelied on such analysis to construct an envelope of likely obtainable benefits from shale gas in theUK [63,81]. For, example IoD 66], suggests among other advantages and benefits, that shale gas hasthe potential to reduce the UK’s import dependency to just 36%, a drastic reduction from 76% withoutshale gas production. This conclusion again contradicts popular studies such as Stevens [11,12] andRogers [71] who believe import levels and prices are unlikely to change due to shale gas production.

US shale gas revolution has changed world energy flows. As reported by the US EIA [73] the US isa net exporter of natural gas. Consequently, there is now more liquified natural gas LNG available forEuropean and Asian markets. This surplus is in addition to US net exports of NG which averaged 0.3Bcfd in 2017 and is forecast to increase to 2 Bcfd in 2018 and 5.4 Bcfd in 2019 [73]. In addition, the US

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now exports more coal to Europe and Asia because this portion has been replaced by natural gas fromshale, for electricity generation [82]. The increased availability of LNG in Asian and European marketswithout a doubt does have an effect on prices in those markets.

The UK imports gas via four main subsea pipelines as in Table 6. The IUK is the only bidirectionalpipeline with the capability to flow gas from Belgium to the UK and vice versa, depending onthe demand-supply and price dynamics between the two countries [83]. Although, with nearly asmuch capacity as the Norwegian Langeled Pipeline, the IUK is less utilised for imports into the UKcompared to the combined imports from Norway. In 2017, the UK imported 75% of its natural gasfrom Norway and this has been the trend for many years [5,11]. Nonetheless, the crucial role playedby the interconnector in providing ‘balancing gas’ to augment the UK’s more reliable supplies fromNorway, as well as offering UK gas companies arbitrage opportunities, may be lost should the UKopt out of the IEM. Yet, the UK still has the choice to negotiate bilateral trade with the EU underone of three options suggested by Ifelebuegu et al. [18]—the European Economic Area trade rules,Comprehensive Economic and Trade Agreement (CETA) or the EU-Swiss Model. Furthermore, the UKhas the infrastructural readiness to increase LNG imports as a short-term energy source to replacemost of the gas from EU interconnectors. That said, immediate benefits that derive from the IEM maybe lost to the UK but there may well be imminent opportunities too, especially with the potentialcommercialisation of shale gas in the UK. Stevens [11] believes reduced UK energy prices due to shalegas is a myth. The author argues that as UK gas prices fall, the country’s physical connection to theEuropean Gas Market via the Batcon interconnector could encourage arbitrage as market participantslook to trade cheaper UK gas in the higher- price European gas markets, which eventually would pushUK gas prices up.

Table 6. Major UK Natural Gas import pipelines and Origin. Source: [83].

No. Name Capacity per Year Percent

1 The UK-Belgium Interconnector (IUK)—a bi-directional pipeline 25.5 BCM 31.82 The UK-Netherlands pipeline 14.2 BCM 17.7

4 The Vesterled Pipeline Link—Connects Scotland to NorwegianGasfileds 14.2BCM 17.7

4 The Langeled Pipeline—connects England to Norway 26.3 BCM 32.8Total 80.2 BCM 100

Following basic laws of demand and supply, the rationalisation may hold true that a Hard Brexitis expected to lock in outflows of UK produced shale gas to the EU’s Internal Energy Market (IEM),where it could receive a higher price and ultimately remove the benefits of cheaper gas prices fromUK residents, whereas a Soft Brexit may erode any benefits of lower UK gas prices from shale gasproduction due to arbitrage activity as suggested by [11]. It is to be noted however, that availableevidence from 2016 fails to support such theory. In addition, it appears that a very large scale of shalegas investment that results in significant recovery of shale gas may weaken this idea.

In this research, it is argued against popular theories of no reduction in energy prices from shalegas [11,12,76], that whether the UK remains within the IEM or not, significant shale gas productioncould reduce gas price and the scale of reduction will be positively correlated to the scale of shalegas recovery from tight rock formations. As an example, in 2016, a 6.5% domestic increase in UKgas production over 2015 resulted to 17% and 4% reduction in industrial and domestic gas pricerespectively, whilst electricity prices reduced 7.5% and 1.9% respectively. It is important to note that,during this period the UK remained a member of the IEM and companies engaged in arbitrage trading.In fact, the UK exported 116.9 TWh (25%) of its natural gas production in 2016 compared to 159.5 TWh(35%) in 2015 [67]) and yet had reduced gas prices. Overall, the UK natural gas production edged upby 2.3% in 2016 than 2015, but that was all it required to trigger the significant energy price savingsabove. Although overall imports were higher by 6.6% in 2016 than 2015, a whopping 20% less LNGimport was required in 2016 compared to 2015. The UK uses LNG imports to balance its gas supply

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deficits from pipelines and this has been the case since 2005. Post-Brexit and given a ‘No-Deal’ or‘Hard Brexit’ with no membership of the IEM, the UK may suffer a combined impact of its lost naturalgas and electricity importation via the EU interconnectors. Currently, the UK imports the larger shareof electricity via the interconnector from France. In 2016, although electricity import fell 13%, it was11 TWh. A likely result of a Hard Brexit would include higher energy prices, albeit only in the short tomedium term. Indeed Pollitt [84] decries arguments that Brexit will result in increased energy bills.He notes that (1) measured benefits to the UK on its membership of the single energy markets hasbeen small and difficult to quantify, and (2) the gains from market integration have remained under5% of costs due to limited interconnection capacity. He also observes there were stable and sometimesdecreasing energy demand for most EU countries since early 2000, and that appear to have limitedtrade gains by large economics, including the UK’s for the IEM. Pollitt however argues that a hardBrexit may rather benefit the UK by reducing energy prices. He notes that a hard Brexit may leadto a small limitation on net imports of electricity from France and Netherlands, but adds that this isabout 6% only, and argues that gains will be made towards reducing UK energy prices from a moresignificant limitation on substantial export of energy from the UK into the EU. Shale gas productionwhich will increase the domestic supply of natural gas will thus reduce energy prices even further.

The UK could still remain in the single energy market. Post-Brexit, the EU electricity marketprovides two models of trade that the UK could exploit. The UK could join the European Free TradeArea (EFTA) and through its membership access the single energy markets should it wish to, in the wayNorway has stayed a member of the single market, but not the EU. Norway, through its membership ofthe NordPool and EFTA has full access to the EU electricity markets with all associated benefits [18,84].

Alternatively, Switzerland is fully integrated into the single electricity market but with limitedparticipation in the market owing to the former’s rejection of the EU’s freedom of movement in2014 [74], similar to a hard Brexit scenario. Nonetheless, it is acknowledged that the Swiss Modelaccrues mutual benefits to Switzerland and the EU and the UK could exploit such a relationship withthe EU should it opt for a hard Brexit).

Without the EU, the UK has the choice to increase its natural gas imports from Norway throughbilateral arrangements via pipeline or import more LNG from elsewhere. Currently, Qatar suppliesabout 80-90% of the UK’s LNG requirements, (this was 15% of the total UK gas demand in 2017) [5,12]and the UK has three LNG receiving facilities with a combined capacity to meet 50% of the UK’sannual demand [83]. It has the option to increase imports from Qatar, Nigeria, Algeria, Trinidad andTobago or from North America. The US exported its first shale gas in LNG to the UK in July 2018 andthe editor of Global LNG Markets at ICIS, Ed Cox believes the US is another potential supplier of UKLNG besides Nigeria, Algeria and Qatar [85]. Indeed, the FT reports that US LNG could serve as analternative for European countries that seek to reduce reliance on Russian pipeline gas [75]. With itsshorter distance to the US, Europe is argued by LNG market analysts to favourably compete againstAsian LNG importers for US LNG [86].

Fundamentally, the benefits of a closed energy market—one similar to the US’s will cause domesticenergy prices to reduce significantly due to the replacement of the share of imported gas which wasused to generate electricity or consumed by industry, households, services, etc. in the UK by shale gasupon start-up, should the UK exit the IEM. Similarly, if the UK were to remain in the IEM post-Brexit,benefits from shale gas would still lead to a reduction in domestic energy price as witnessed in 2016with the start-up of the Laggan and Cygnus gas fields. Furthermore, increased energy prices havebeen linked to periods of lower domestic production and higher imports and exports of gas, whilstlower energy prices have been linked to periods of higher domestic production as seen in 2016, andthe period before 2000 until 2004 as in Figure 6. These factors do suggest UK energy prices couldsignificantly reduce with strong recovery rates of shale gas, and such an impact stands to be felt by UKhouseholds and businesses whether the UK remains or not within the IEM. This analysis is consistentwith the analysis contained in the European Parliamentary Research Service’s research on the potentialimpact of shale gas on EU energy security. The research document offers evidence on and argues

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that shale gas may not lead to energy self-sufficiency within the EU but could lead to reduced energyprices [46].



peaking in 2000 and 2004 for oil and gas production respectively, and thus offer support to the notion that increased domestic shale gas would likely lead to a reduction in energy prices.

Figure 6. UK Trade in Natural Gas from 1990 to 2016. Showing the UK’s growing net imports of natural gas in recent years. Source: [67].

4.4. Brexit, Exchange Rates and Energy Prices

It has been recorded that Brexit is to blame for the falling value of the Sterling to the Euro and Dollar since the Brexit referendum. The UK imports a significant portion of its gas as shown in this research, and thus pays more to import gas if the Sterling weakens in value. In a report commissioned by Ofgem, Gissey et.al [87] record that the falling value of the Sterling increased wholesale energy generation costs. The authors provide an intriguing insight that retail energy prices after the Brexit vote were increased just about the same degree to which wholesale energy generation input costs had increased due to the weakening effect that Brexit had caused the Pound Sterling. The authors note that a year following the referendum, wholesale natural gas prices which represent 39% of final consumer gas price increased 16% due to a weaker pound sterling. This phenomenon added £2 billion to UK energy bills; £75 rise in an average energy bill; £39.4 and £35.3 for gas and electricity bills respectively, with similar projections for 2019 to 2020. Meanwhile wholesale costs represent over a third of electricity price paid by consumers [88]. Gissey et al. [87] therefore conclude that the effects of Brexit on energy prices manifest mainly through the impact on exchange rates. They find that the 2016/2017 consumer price increase in electricity prices of 6% corresponds to the increase in wholesale energy costs. We argue on the back of this evidence that a sustained decline in the value of the pound will lead to higher wholesale gas prices and lead to higher retail energy price. Thus, households will pay more. In addition, leaving the internal energy market implies the UK may trade energy less efficiently and this could lead to higher prices. As an example, it is reported by [56] market coupling (an algorithm used to trade electricity on the IEM), worth £100M/year to the UK enables UK companies to automatically match demand and supply efficiently via interconnection and reduce operating costs. This benefit could be lost post-Brexit as there are no provisions in the IEM for “third countries” [56]. The UK could thus lose this privilege in the same way Switzerland lost it too. This could mean more transaction and intermarket cost per unit of energy production, which may be passed onto final consumers as increased energy prices.

As indicated in the foregoing analysis in Sections 4.1 and 4.3, however, commercial exploitation of shale gas which also constrains the additional production of gas to the UK could reverse this

Figure 6. UK Trade in Natural Gas from 1990 to 2016. Showing the UK’s growing net imports of naturalgas in recent years. Source: [67].

Figure 6 suggests the UK imported relatively less volumes of natural gas between 1990 and 2004compared with her current levels of natural gas imports in excess of 500 TWh in 2016. The periodof lower imports coincides with lower energy prices and higher domestic production of fuels untilpeaking in 2000 and 2004 for oil and gas production respectively, and thus offer support to the notionthat increased domestic shale gas would likely lead to a reduction in energy prices.

4.4. Brexit, Exchange Rates and Energy Prices

It has been recorded that Brexit is to blame for the falling value of the Sterling to the Euro andDollar since the Brexit referendum. The UK imports a significant portion of its gas as shown in thisresearch, and thus pays more to import gas if the Sterling weakens in value. In a report commissionedby Ofgem, Gissey et.al [87] record that the falling value of the Sterling increased wholesale energygeneration costs. The authors provide an intriguing insight that retail energy prices after the Brexitvote were increased just about the same degree to which wholesale energy generation input costshad increased due to the weakening effect that Brexit had caused the Pound Sterling. The authorsnote that a year following the referendum, wholesale natural gas prices which represent 39% of finalconsumer gas price increased 16% due to a weaker pound sterling. This phenomenon added £2billion to UK energy bills; £75 rise in an average energy bill; £39.4 and £35.3 for gas and electricitybills respectively, with similar projections for 2019 to 2020. Meanwhile wholesale costs representover a third of electricity price paid by consumers [88]. Gissey et al. [87] therefore conclude that theeffects of Brexit on energy prices manifest mainly through the impact on exchange rates. They findthat the 2016/2017 consumer price increase in electricity prices of 6% corresponds to the increase inwholesale energy costs. We argue on the back of this evidence that a sustained decline in the valueof the pound will lead to higher wholesale gas prices and lead to higher retail energy price. Thus,households will pay more. In addition, leaving the internal energy market implies the UK may tradeenergy less efficiently and this could lead to higher prices. As an example, it is reported by [56] marketcoupling (an algorithm used to trade electricity on the IEM), worth £100M/year to the UK enablesUK companies to automatically match demand and supply efficiently via interconnection and reduce

Energies 2019, 12, 600 16 of 21

operating costs. This benefit could be lost post-Brexit as there are no provisions in the IEM for “thirdcountries” [56]. The UK could thus lose this privilege in the same way Switzerland lost it too. Thiscould mean more transaction and intermarket cost per unit of energy production, which may be passedonto final consumers as increased energy prices.

As indicated in the foregoing analysis in Sections 4.1 and 4.3, however, commercial exploitation ofshale gas which also constrains the additional production of gas to the UK could reverse this situation,but production of additional gas from shale would need to be expedited to realise and maximisesuch benefits.

5. Conclusions and Recommendations

Contrary to popular theories on shale gas and UK energy price, the evidence presented in thispaper suggests a reduction in household energy bills is possible under soft or hard Brexit scenarios.For a significant domestic shale gas production, the UK stands to benefit from the impact of additionalgas injected into its local gas market. Such excess gas, similar to the one seen in 2016 with thestart-up of the Laggan field, could reduce energy prices despite arbitrage activities within Europe viainterconnectors. Similarly, a hard Brexit which locks domestic UK shale gas production to UK gasmarkets could have even more benefits and reduce gas and energy prices for UK households andbusinesses. Nevertheless, Brexit appears to threaten higher energy prices for the UK. It added about£2bn in 2016/17 to energy bills and energy prices are projected to rise due to spillover effects fromBrexit. It is evident from the research that a weak Pound Sterling corresponds to higher wholesaleenergy input costs and thus increased retail energy price. Brexit has been found to weaken the value ofthe Sterling and a further weakening could lead to increased wholesale gas and electricity costs whichin turn represent at least a third of the energy prices paid by UK consumers. In addition, withdrawalfrom the IEM could lead to inefficient trading of energy by the UK and push energy prices up.

Meanwhile evidence suggests that the UK has the potential to extract significant volumes ofnatural gas from tight shale formations. It is found that commercialisation of shale gas at currentproduction estimates could potentially replace the proportion of gas imported from Europe viainterconnectors and thus remove the impact of exchange rate on the cost of energy generation andwholesale price of energy, leading to reduced consumer price. Importantly, a market arrangementwhere the domestic natural gas market in the UK shrinks from the open EU IEM to a closed UK-onlygas market will manifest benefits similar to that of the US’s shale gas for US households and businessesdue to additional supply at equilibrium demand levels. Sadly, however, it appears that the uncertaintythat accompanies Brexit, has starved the UK energy industries including the nascent fracking industryof critical investment capital required to develop shale gas and the fact that the resource is beingdeveloped first time may have even worsened this situation. The current research argues that, suchnegative consequences could be curtailed by expediting natural gas development projects that bringnew supplies onstream as they have proved to moderate price as seen in 2016 with the start-up of theLaggan and Cygnus gas fields. Shale gas development and exploitation offer huge potential and somehope for UK energy consumers, but its development must be expedited in order be able to cash in on,and maximise any benefits from it.

The results of the current research are based on conjectured shale gas recovery factors. Whilstsuch analysis is acceptable, it would have been more valuable to be able to empirically test the extentof the impact of shale gas production on wholesale gas price and the eventual implication for finalconsumers, especially the extent to which shale gas reduces retail gas price. Quantitative simulationof such relationship based on shale gas production data would enable improved quantification ofthe benefits of shale gas to the UK energy consumer. Such research should be conducted as soon asthe requisite data becomes available from shale gas operating companies. It is also recommendedthat further studies be conducted on the options the UK Government has for expediting shale gasexploitation, especially focusing on the changing landscape of energy resource development andfiscal policy.

Energies 2019, 12, 600 17 of 21

Author Contributions: For research articles with several authors, a short paragraph specifying their individualcontributions must be provided. The following statements should be used “Conceptualization, E.A.-A.;Methodology, E.A.-A.; Software, E.A.-A. and A.O.I.; Validation, E.A.-A. and S.C.T.; Formal Analysis, E.A.-A. andA.O.I.; Investigation, E.A.-A.; Resources, E.A.-A.; Data Curation, E.A.-A., A.O.I. and S.C.T.

Funding: This research received no external funding.

Conflicts of Interest: The authors declare no conflict of interest.

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https://www.bloomberg.com/news/articles/2018-04-06/summer-of-lng-starts-with-a-bang-in-u-k-as-u-s-plant-ramps-up

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